Subsection 1102(1)
Paragraph 1102(1)(a)
Administrative Policy
92 CPTJ - Q.13
Where a "mothballed" facility is transferred by a parent to a subsidiary, is held by the subsidiary as in adventure of the nature of trade and then sold by it, both ss.1102(1)(a) and 1102(14) apply, but s. 1102(1)(a) will take precedence. Accordingly, the subsidiary will not be entitled to CCA.
Paragraph 1102(1)(b)
Cases
C.A.E. Inc. v. Canada, 2013 DTC 5084 [at at 5944], 2013 FCA 92
The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.
In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):
[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.
In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):
Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.
The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property | characterization of depreciable property or inventory done on annual basis | 371 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) | change in use on depreciable property conversion to inventory | 124 |
| Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) | applied to conversion of depreciable property into inventory | 184 |
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Machinery and Equipment | 371 |
See Also
Sivasubramaniam v. The Queen, 2008 DTC 3886, 2008 TCC 261 (Informal Procedure)
The taxpayer argued that his rental condominium units were not rental properties because they had been acquired by him with a view to their resale at a capital gain. Bowman C.J. noted that such an intention would be inconsistent with claiming capital cost allowance. He also noted (at para. 9) that although property held for sale might not be "described" in the taxpayer's inventory, "the short answer, I believe, is that paragraph 1102(1)(c) is probably unnecessary" given that property that was inventory, whether or not described in a list called an inventory, would not be eligible for a capital cost allowance as it would not have a capital cost.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | hope to dispose of at gain consistent with capital property | 64 |
| Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(14) | 79 | |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) | capital gains from resale not a permitted purpose | 63 |
Administrative Policy
25 September 2007 Internal T.I. 2007-0226751I7 F - Gain en capital versus revenu d'entreprise
The corporation’s regular activities involved the purchase of particular (redacted) types of equipment or vehicles that were damaged and/or out-of-use in order to restore them and rent them, following which, it would sell them at a gain over its cost. Some were sold without even having been rented previously. It also purchased items for parts only, which were disassembled so that the parts could be used in refurbishing the other items.
Before finding that the items (both those purchased for parts and those purchased for refurbishment and sale) were inventory rather than depreciable property, the Directorate noted, regarding the latter, the three criteria in IT-102R2, para. 4 for the sale of leased property not constituting income from the sale of inventory, including (in subpara. 4(c),) that the properties “are normally sold for an amount that is less than their cost to the taxpayer,” and stated that this condition was not satisfied since the items were sold at a profit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Machinery and Equipment | the regular refurbishing, rental then sale at a gain of machines gave rise to business profits | 109 |
20 July 2000 Internal T.I. 2000-0035017 - Conversion Capital Property to Inventory
When trucks of a leasing company reach the termination of the respective leases at the three-year point, there is a conversion of capital property to inventory, and capital cost allowance may not be claimed. "While a truck rental company would not be seen as having converted capital property to inventory when the leased trucks are being replaced only when worn out or obsolete ... where leased vehicles are withdrawn from leasing part prior to that time and are sold as an integral part of the taxpayer's normal business operations, a conversion of the trucks to inventory is considered to occur prior to their sale."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Computation of Profit | 105 |
Paragraph 1102(1)(c)
Cases
Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336, [1998] 1 CTC 213
The taxpayer received equipment on the winding-up of the wholly-owned subsidiary and, five days later, transferred the same assets to another subsidiary.
In connection with finding that the equipment qualified in the taxpayer's hands as depreciable property, McLachlin J. stated (at para. 7):
The fact that the assets produced revenue, as the reasons of L’Heureux-Dubé J. demonstrate, establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(1)(c). The fact that the revenue was small or earned over a short period of time does not take them out of this category. We need not decide whether a different result might flow if the evidence viewed as a whole showed that the assets possessed a non-revenue function: see Clapham v. M.N.R., 70 D.T.C. 1012 (T.A.B.); Bolus-Revelas-Bolus Ltd. v. M.N.R., 71 D.T.C. 5153 (Ex. Ct.). Nor is the case of assets held for such a short period of time that the revenue produced was too small to calculate (e.g., the case of the instantaneous or same day rollover) before us. Here the assets served only one function, to produce income.
L’Heureux‑Dubé J in her concurring reasons stated (at paras. 63-65):
[T]o avoid absurdity in the context of the present case, s. 20(1)(a) must be understood as follows:
...there may be deducted…such part of the capital cost . . . of [income-producing] property [or, alternatively, property acquired for the purpose of producing income]….
…[T]o satisfy this first part of the test, it is sufficient to presume that if the property produces revenue, it indeed meets the requirements of Regulation 1102(1)(c). …
The second part of the test… determined by an objective evaluation of the specific facts and circumstances of each case in relation to appropriate jurisprudence, having regard to whether the taxpayer acted in accordance with reasonably acceptable principles of commerce and business practices.
Interprovincial Co-operative Ltd. v. The Queen, 87 DTC 5115, [1987] 1 CTC 222 (FCTD)
A manufacturing plant which had been shut down and foreclosed upon several years previously was reacquired by the taxpayer because its parent had so directed it to do so in order to access capital cost allowance and interest deductions, and not for the purpose of gaining or producing income. It accordingly was unnecessary for Martin J to determine whether it was sufficient for purposes of Reg. 1102(1)(c) for a property to be acquired for the purpose of gaining or producing income generally (in contra-distinction to income from the specific property.)
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Onus | 62 | |
| Tax Topics - Income Tax Act - Section 135 - Subsection 135(4) - Income of the Taxpayer Attributable to Business Done With Members | 53 |
Roywood Investments Ltd. v. The Queen, 79 DTC 5451, [1980] CTC 19 (FCTD), aff'd 81 DTC 5148, [1981] CTC 206 (FCA)
The sole purpose of the taxpayer in purchasing land with a building was to realize a substantial capital gain from the property when the opportunity to do so arose. The building accordingly was not acquired for the purpose of gaining or producing income, as required by regulation 1102(1)(c).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(c) | 70 | |
| Tax Topics - Income Tax Act - Section 68 | 67 |
Bureau et Bureau Inc. v. The Queen, 78 DTC 6562, [1978] CTC 695 (FCTD)
It was found that several old residential and commercial buildings had been purchased by the appellant with the intention of eventually demolishing them, in order to permit it to construct larger premises in which to carry on its furniture business, rather than to produce rental revenues. The buildings accordingly had not been acquired "for the purpose of gaining or producing income" as required by Regulation 1102(1)(c).
Ben’s Ltd. v. MNR, 55 DTC 1152, [1955] CTC 249 (Ex Ct)
In order to expand its factory, the taxpayer acquired three adjoining properties comprising land and three dwelling houses. In finding that the dwellings did not qualify as depreciable property, Cameron J stated (pp. 1156-7):
There was only one purpose, namely, to secure a site for the extension. I regard the reeipt of a few months’ rent as a merely fortuitous event.
See Also
Damis Properties Inc. v. The Queen, 2021 TCC 24
The taxpayers, after their subsidiaries realized capital gains liabilities from the sale of a farm (held through partnerships), sold those subsidiaries to a third party at a price that reflected the assumption of WTC that it would be able to eliminate such capital gains tax liability. It emerged much later that WTC’s plan was simply to make CCA claims on software transferred post-closing into the purchased subsidiaries - which Owen J found did not satisfy the income - producing purpose test in Reg. 1102(1)(c), as to which he stated (at paras. 266-267)
In my view, the only reasonable inference to be drawn from Mr. Nerland’s testimony and the relevant exhibits is that the purported purchase of computer software by the subsidiaries was not in furtherance of a bona fide business venture undertaken by the subsidiaries but was solely to allow the subsidiaries to claim capital cost allowance in their T2 tax returns to reduce the tax liability of the subsidiaries resulting from the sale of the farmland. Accordingly, I find that the computer software was not acquired for the purpose of gaining or producing income as required by paragraph 1102(1)(c) of the ITR and therefore no capital cost allowance can be claimed by the subsidiaries in respect of the computer software.
I also find that the debt purportedly evidenced by the $8 million promissory notes was not incurred by the subsidiaries for the purpose of gaining or producing income from the computer software as required by subparagraph 20(1)(c)(ii) of the ITA and therefore the interest on the notes was not deductible in computing the income of the subsidiaries.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) | s. 160 did not apply to a sale of companies holding cash sales proceeds to a purchaser who purported to eliminate the tax liability | 785 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit | no tax benefit based on comparison to a commercially unrealistic alternative | 276 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) | no avoidance transaction where there was no intention to avoid the provision purportedly abused | 339 |
| Tax Topics - General Concepts - Onus | unfair to place the onus on taxpayer re facts which taxpayer could not reasonably be expected to know | 339 |
568864 B.C. Ltd. v. The Queen, 2014 TCC 373
The taxpayer - which was a member of group of companies that included a producer of exterior trim boards for construction ("W.L.") – earned management fees and rental fees from W.L. In 2003, the taxpayer lent $3.5 million to an arm's length supplier of specially prepared boards ("Interact") secured by patents held by Interact's principal ("Cable").
Following the bankruptcy of Interact and Cable earlier in 2005, the trustee in bankruptcy for Cable assigned the beneficial ownership of the patents to the taxpayer, so that it was deemed under s. 79.1 (6) to have acquired them at a cost of $3.5 million plus $0.4 million of relevant legal costs. The taxpayer claimed a terminal loss of $3.9 million when it sold its beneficial interest in the patents for $1 in 2007 to a related corporation.
In finding that the patents satisfied Reg. 1102(1)(c), Rip J noted that the taxpayer had made the $3.5 million loan in order to assist a financially strapped supplier (Interact) to supply it with the wood sizes it wanted, and that it acquired the beneficial ownership in 2005 with the objective (which was not realized) of exploiting the patents in a future joint venture so that the taxpayer could derive licensing revenues from them.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Ownership | beneficial ownership in patents | 434 |
| Tax Topics - Income Tax Act - Section 79.1 - Subsection 79.1(2) | beneficial ownership in patents | 434 |
Garber v. The Queen, 2014 DTC 1045 [at at 2812], 2014 TCC 1
The taxpayer bought units in a limited partnership, which was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") purchased a smaller yacht (the S/Y Garbo) to be used for the provisioning of supplies to an envisaged fleet of yachts for the partnership in question and 35 others, which were never acquired. The purported business plan for the 36 partnerships represented a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).
In finding that no capital cost allowance could be claimed by the partnership in question in respect of the S/Y Garbo, Rossiter ACJ found (at para. 402) that the test in Reg. 1102(1)(c) was not satisfied as "the yacht was only used by OCGC as window-dressing to perpetuate the fraud and was never acquired by the ... LP for income gaining or earning purposes."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property | title not held by GP on behalf of partnership | 122 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | expenses mere window-dressing | 135 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | no source required if reasonable expectation of income | 241 |
| Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit | fraudulent scheme not a source | 240 |
| Tax Topics - Income Tax Act - Section 96 | GP had fraudulent intention | 241 |
Jolly Farmer Products Inc. v. The Queen, 2008 DTC 4396, 2008 TCC 409
In finding that the taxpayer was entitled to deduct capital cost allowance in respect of houses situate close to the taxpayer's greenhouse operation and occupied by employee-shareholders of the corporation (all of whom had similar religious beliefs), Bowman, C.J. stated (at para. 23-24):
"Once I conclude that it is a business decision to house the employees in company-owned houses and to provide other facilities in the Commons it is not up to me or the Minister to question that decision, even if I were to disagree with it, which I do not ... . This case is an excellent example of the CRA seeking to substitute its business judgment for that of the taxpayer."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | 119 |
Sivasubramaniam v. The Queen, 2008 DTC 3886, 2008 TCC 261 (Informal Procedure)
Bowman C.J. indicated that if the taxpayer's submission, that he acquired condominium rental units for the purpose of the resale thereof at a capital gain rather than as rental properties, were accepted, then the taxpayer would not be entitled to capital cost allowance by virtue of Regulation 1102(1)(c), given that subsection 9(3) excluded taxable capital gains from income from a property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | hope to dispose of at gain consistent with capital property | 64 |
| Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(14) | 79 | |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(b) | 111 |
Sherman v. The Queen, 2008 DTC 3069, 2008 TCC 186, aff'd 2009 DTC 5681, 2009 FCA 9
The taxpayers were found to have acquired rights in respect of computer software solely for tax-motivated reasons, with no ancillary income-earning purpose.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | 102 |
McCoy v. The Queen, 2003 DTC 660, 2003 TCC 332
Before going on to find that a limited partnership had acquired software for the purpose of gaining or producing income, Bowman A.C.J. stated (at p. 678):
"Intention is subjective. Purpose, while it may involve a subjective element, must be largely determined on the basis of objective considerations. It is impossible if one looks at the material that was presented to the investors to conclude that the earning of income was not a purpose of the partnership."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Evidence | 122 | |
| Tax Topics - General Concepts - Purpose/Intention | intention objectively determined having regard to the material presented to investors | 83 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | 202 | |
| Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(d) | 118 | |
| Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(15) | 113 |
Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)
The word "income" in Regulation 1102(1)(c) means an amount that would be subject to tax, not net income. That requirement was satisfied with respect to the acquisition of software game "engines" by a partnership notwithstanding that the partners may have invested to save tax. They reasonably expected to make a profit from the programs.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Fair Market Value - Other | 209 | |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | 71 | |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) - Paragraph 13(27)(d) | 143 | |
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | partnership purchase was NAL given that GP's shareholder acted in concert with vendor | 145 |
| Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(d) | 69 |
Gascho Farms Ltd. v. The Queen, 97 DTC 808, [1997] 1 CTC 2092 (TCC)
A residential property that the taxpayer received as partial consideration for the sale by it of substantially all its properties and that it rented out for a brief period before selling it, was found not to have been acquired for the purpose of gaining or producing income given the lack of real estate experience of its principal, the reason for receiving the property, and the low rents received on the property.
Malatest v. The Queen, 94 DTC 1779 (TCC), briefly aff'd 96 DTC 6377 (FCA)
The taxpayers, were unsuccessful in their initial attempts to sell their Toronto condominium unit after purchasing a Toronto house and commenced advertising the condominium as a rental apartment while also continuing in their attempts to sell the condominium. The unit ultimately was sold in the following year.
In finding that the condominium unit during this period was not a depreciable property (with the result that the taxpayers were not able to deduct a terminal loss based on its decline in value during the period). Christie A.C.J. stated (p. 1782) that:
"Their over-riding purpose was to sell the apartment" and "the notion of renting was ... really related to the hope of somehow cutting their losses rather than for the purpose of producing income".
Moldaver v. MNR, 92 DTC 1564, [1992] 2 CTC 2055 (TCC)
The taxpayer was found to have acquired a 12-year old building, containing two vacant small offices and a third office being used by a practising dentist, for the purpose of gaining or producing rental income therefrom notwithstanding that he entered into a contract to demolish the building eight months later.
Administrative Policy
13 July 2012 External T.I. 2012-0443281E5 F - DPA- véhicule dans le cadre d'un bien locatif
CRA indicated that there was no particular reason to consider that capital cost allowance (CCA) for a motor vehicle that is used by a taxpayer to earn rental income from rental properties could not be deducted in computing that income subject to the Reg. 1100(11) limitation, irrespective of whether the rental income was property income or business income.
22 March 2012 External T.I. 2011-0425571E5 F - Avantage imposable - maison habitée sans frais
Can a corporation claim capital cost allowance ("CCA") on a house it owns, but which is made available for habitation by an employee-shareholder so that such individual can respond to the needs of the corporation’s farming business. CRA responded:
[W]here a person who is both a shareholder and an employee of a corporation receives a benefit from that corporation that is not available to other employees, … [CRA] generally considers that there is a presumption that the person has received that benefit as a shareholder. …
CCA … could not be claimed for a capital expenditure related to a shareholder benefit because the property in question was not acquired for the purpose of gaining or producing income … .
[F]or CCA purposes, the property made available to an employee-shareholder as an employee would be considered to be acquired by the corporation for the purpose of gaining or producing income.
23 January 2012 External T.I. 2011-0409671E5 F - Propriété superficiaire
Corporation A erected, at its expense and for exclusive use in its transport business, a detached garage on the land on which the principal residence of its individual shareholder (the “Taxpayer”) is located. The land subjacent to the garage is leased to it by the Taxpayer. After indicating that Corporation A would be entitled to claim capital cost allowance ("CCA") only if it held the right of superficies to the garage (i.e., by deed it was agreed that the Taxpayer would have no right of accession to the garage), CRA went on to state:
On the other hand, if the taxpayer owns the garage, the taxpayer would not be entitled to CCA because the facts do not allow us to conclude that the taxpayer uses it for the purpose of earning income. Indeed, under paragraph 1102(1)(c) … depreciation is deductible only if the property was acquired for the purpose of gaining or producing income.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (e) | land leased to corporation for business use not part of principal residence | 160 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | benefit if building constructed at corporation’s expense for business purposes becomes shareholder’s property by accession | 154 |
| Tax Topics - General Concepts - Ownership | whether tenant had Quebec right of superficies to garage erected by it determined whether it was its property | 91 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property | building erected by corporation on shareholder’s land not depreciable property unless shareholder renounces right of accession | 223 |
18 May 2011 External T.I. 2011-0392441E5 F - Outils - déduction pour amortissement
After finding that small tools that the taxpayer purchased at a unit cost of less than $200 to maintain the units in a rental building (one of which was occupied personally) qualified as Class 12 depreciable assets, CRA went on to find that the taxpayer’s capital cost allowance claims “must be reduced to reflect the personal use that is made of [the tool].”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 12 - Paragraph (c) | small tools were Class 12 assets rather than currently deductible | 127 |
21 September 2010 Internal T.I. 2010-0377011I7 F - Dépenses de vêtements - travailleur indépendant
In finding that CCA could not be deducted by a self-employed welder following the acquisition of steel-toed work boots and fire-resistant clothing, CRA stated:
…[T]he cost of steel-toed work boots and flame-retardant clothing of a self-employed person who carries on a business as a welder are personal expenses that are not deductible from the self-employed person's business income where such clothing can be used otherwise than in the course of carrying on the business. … Our position might be different if these boots and clothing were used by the self-employed worker only in the course of performing the worker’s welding activities.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | no deduction to self-employed welder for work boots and fire-resistant clothing | 98 |
S3-F4-C1 - General Discussion of Capital Cost Allowance
Demolished building
1.56 [A] taxpayer might purchase real estate that includes a building and tear down the building relatively soon after the purchase. ... [W]here the building is used to earn income for only a short time prior to demolition, it is likely that the building will not be regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. …
Capital loss on demolished building
1.83 If a building is demolished without being used for the purpose of gaining or producing income, it would likely not be depreciable property in the purchaser's hands by reason of paragraph 1102(1)(c) of the Regulations. Accordingly, the purchaser would not be entitled to CCA or a terminal loss. Instead, the demolition of the building would be considered a disposition and may result in a capital loss in the purchaser's hands.
28 May 2004 Internal T.I. 2004-0065101I7 F - Tenures à bail - Catégorie 13 et loyers
The taxpayer carried on its business in rented premises to which it made leasehold improvements, and then relocated to leased premises (to which it made no leasehold improvements) at a second location without being able to terminate its lease of the first premises. In finding that the lease payments on the first premises continued to be deductible, the Directorate stated:
Since the first premises were rented in the course of the taxpayer's business and the decision to relocate was motivated by a business decision, we are of the view that the rent expense incurred by the taxpayer in respect of the first premises after the relocation would be deductible from the taxpayer's business income to the extent that the premises have not been used for other purposes since the relocation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs | rent on premises continued to be deductible after they were vacated | 136 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) | no change of use when premises were vacated | 180 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Disposition of Property | no disposition when premises were vacated (but not abandoned) | 254 |
1 August 2003 Internal T.I. 2003-0009697 F - Usufruit et amortissement
In 1990, an individual died and bequeathed the usufruct of an immovable to a friend. CCRA noted that, in the absence of the application of the revised version of s. 248(3), no CCA could be claimed because the usufructuary did not own the property, and the bare owner was not entitled to any of the income generated by the property as required under Reg. 1102(1)(c).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(3) | s. 248(3) generates CCA claim to deemed trust, whereas previously no CCA was available | 109 |
14 March 2003 External T.I. 2003-0002465 F - Usu-droit privé franc.- nu- prop. Canadien
The taxpayer acquired, by will, the bare ownership (under French law) of a French rental property, with the rental income therefrom going to her mother as usufructuary. CCRA indicated that since the property did not generate rental income to the taxpayer, she could not claim (as per Reg. 1102(1)(c)) CCA on the property (including the costs of renovations).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) | change of use to bare owner when usufruct over French rental property was extinguished | 95 |
21 January 2003 External T.I. 2001-0109445 F - Usufruit-droit privé français-nu-prop. Cdn.
At the time of the death in 1985 of the taxpayer’s father, the usufruct under French law of a rental property located in France vested in the taxpayer’s mother, while the bare ownership of the same property vested in the taxpayer, who was responsible, as bare owner, for major works to the property. CCRA indicated that the taxpayer (prior to the extinction of the usufruct) would not be entitled to claim CCA on the property given that it was the usufructuary who was entitled to the rental income.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 70 - Subsection 70(5) | when usufruct created by will, legatee of bare ownership acquired it at FMV of bare ownership | 84 |
5 March 2002 Internal T.I. 2001-0102757 F - PERTE FINALE
In order to enlarge the parking lot on its existing rental property and improve the visibility of the existing buildings, the taxpayer acquired an adjoining lot with building, incurred costs in relocating that building, capitalized those relocation costs to that building and then sold the building to a third party and claimed a terminal loss most of which represented such capitalized costs.
In finding that such terminal loss should be denied, the Directorate indicated that the removed building did not constitute depreciable property by virtue of Reg. 1102(1)(c): “the taxpayer's primary intention was to free up the lot in order to expand the parking lot and give greater visibility to the other businesses located on the site” and not to generate income from the building “since it was already generating income” and the move did not improve the building's income-generating ability.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base | cost of moving rental building off land for subsequent sale, in order to construct parking lot and create more space for existing rental buildings, was addition to ACB of land | 161 |
Income Tax Regulation News, Release No. 3, 30 January, 1995 under "Use of a Partner's Assets by a Partnership"
Where a property is acquired by a partner for the purpose of making it available to the partnership to be used in carrying on the business of the partnership, that property will be considered to have been acquired by the partner for the purpose of earning income if the partnership business is carried on with a view to profit, notwithstanding that the partner does not charge rent to the partnership.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | 72 | |
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(1) | 38 |
Income Tax Regulation News, Release No. 3, 30 January 1995, under "Loss Utilization within a Corporate Group"
Whether the reasoning in Hickman Motors (93 DTC 5040, [1993] 1 CTC 36) applies to a particular loss-consolidation scheme "will depend on all of the relevant circumstances, including the length of time over which the asset is held by the transferee, the use to which the asset is put by the transferee and the income earned by the transferee with the asset".
Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films C.C.A.")
Favourable income tax rulings will not be given where there is a probability that a partnership acquiring a film will not make an economic profit but will rely on tax deductions.
21 November 1990 Memorandum (Tax Window, Prelim. No. 2, p. 8, ¶1074)
A partner is not permitted to deduct any CCA on assets owned by the partner and used in the partnership business unless a fair market value rent is charged to the partnership.
81 CR - Q.23
Where a partnership uses assets of a partner, the partner is entitled to claim CCA provided that a fair market value rental is charged to the partnership.
Paragraph 1102(1)(d)
See Also
Agence du revenu du Québec v. 7958501 Canada Inc., 2022 QCCA 314
A private company (“SherWeb”) transferred software, which it had developed and then used in its business, to a newly-formed sister company (“501”) at a gain (with such software licensed back to it for continued use in its software services business).
The Court found that although the acquired software was depreciable property to 501, it had not been depreciable property to SherWeb because SherWeb, rather than claiming capital cost allowance respecting the software, had treated its software development expenses as deductible SR&ED expenses, so that the software had been excluded from treatment in its hands as depreciable property pursuant to the Quebec equivalent of Reg. 1102(1)(d) (which so excludes any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37). Accordingly, Taxation Act s. 99 (imposing the equivalent to the ½ step-up rule in ITA s. 13(7)(e)) did not apply to reduce the capital cost to 501 of the acquired software.
The Court stated (at para. 28, TaxInterpretations translation):
One cannot escape the fact that, to SherWeb, the Software has never been treated as a depreciable asset, and so continually until the time "immediately before the transfer" to the respondent.
The Court further rejected an ARQ submission that the Reg. 1102(1)(d) equivalent was intended only to preclude a double deduction (for SR&ED and CCA) and not to avoid the ½ step-up rule.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) | software that was not depreciable property to the transferor because it was written off as SR&ED was not subject to s. 13(7)(e) to the NAL transferee | 294 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property | software for which no CCA claims had been made because its development costs were deducted as SR&ED, was not depreciable property | 465 |
7958501 Canada Inc. v. Agence du revenu du Québec, 2020 QCCQ 2424, aff'd 2022 QCCA 315
A private company (“SherWeb”), which provided the use of software developed by it to paying subscribers, transferred its software and other IP to a newly-formed sister company (“501”) at a gain for creditor-proofing reasons (with the IP licensed back to it for continued use in its software services business). Although 501 treated the acquired IP as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property rather than depreciable property.
Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d) (which excludes, from depreciable property, any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37), stating (at para. 95, TaxInterpretations translation) that “SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) | software whose development was deducted under s. 37 could be stepped up on a related-party transfer notwithstanding s. 13(7)(e) | 476 |
| Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Variable E | software created through currently deductible salary expense was disposed of as eligible capital property rather than depreciable property | 296 |
Paragraph 1102(1)(e)
See Also
Roger Dubois Inc. v. The Queen, 2014 DTC 1094 [at 3167], 2013 TCC 409, briefly aff'd 2015 CAF 235
The taxpayer purchased violins and violin bows, which had been fabricated between 1705 and 1844, for purchase prices aggregating $1.4 million. It also purchased (for $0.56 million) the "Sartory bow" in 2002, whose fabrication date was unknown other than that it had been anonymously estimated to be "about 1900." The taxpayer leased these items to a subsidiary, which provided them to performing musicians for promotional purposes. The taxpayer's capital cost allowance claims were denied on the basis that each instrument, although not "antique furniture," was "any other antique object, produced more than 100 years before [acquisition]."
The taxpayer unsuccessfully argued that Reg. 1102(1)(e)(iv) referred "to decorative objects and not objects that are used, as is the case with the musical instruments in question" (para. 25). Jorré J found (at para. 19) that "antique" merely referred to the "non-recent past" and that "the context of the provision does not suggest a limitation other than objects that are more than 100 years old" (para. 33); and noted (at para. 37) that, unlike the Budget papers, "antique object" rather than an "antique" was referred to.
The appeal was dismissed except with respect to the Sartory bow, which the Minister had not established to have been over 100 years old. Its tendency to appreciate over time was irrelevant (para. 24).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions | "deems" has several meanings | 110 |
| Tax Topics - Statutory Interpretation - Noscitur a Sociis | no implied similarity requirement | 158 |
Administrative Policy
18 June 2015 External T.I. 2015-0580391E5 F - Achat et location d'oeuvres d'art
Can a taxpayer claim capital cost allowance respecting amounts paid for the acquisition of works of art for the interior decoration of offices or the common areas of its place of business? In the course of a general response, CRA noted the exception in Reg. 1102(1)(e), and stated:
If it is the work of a Canadian for which CCA is allowed, it will be included in Class 8….
8 October 2010 Roundtable, 2010-0373311C6 F - Oeuvres d'artistes étrangers
A public corporation acquires such works of art from foreign artists, for example, paintings that are used to decorate the boardroom in a director's office, where clients are not received). Are the works capital property that cannot be depreciated? After noting that the works would not be listed personal property, CRA stated:
In general, a painting by a foreign artist that has a cost to the corporation of not less than $200 and is not listed personal property would then be considered to be capital property that is not depreciable because of ITR paragraph 1102(1)(e).
… Our response would remain the same in the case of a painting located in the office of a director who does not receive clients in that office … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Listed Personal Property | art work in corporate boardroom is not personal use property, perhaps also where decorates office | 197 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | art used to decorate the office of a shareholder-employee generally does not generate a s. 15(1) benefit | 92 |
12 October 1994 External T.I. 9420045 - CANADIAN'S ARTOWRK
Property that is jointly created by a Canadian and a non-Canadian artist will not qualify for the exception for property created by an individual Canadian.
Regulation 1102(2)
See Also
Cheshire Cavity Storage 1 Ltd & Anor v Commissioners for Her Majesty's Revenue and Customs, [2022] EWCA Civ 305
The taxpayer, which was engaged in the development, construction, and operation of gas storage facilities in the UK, was found not to be entitled to capital allowances in respect of the expenditure incurred on the introduction of water into salt bearing rock so as to dissolve the rock and create an impervious cavity (“leaching”), and the displacement of the resulting brine by the introduction of gas (“de-brining”) so as to permit the storage of gas in the cavity, on the basis that the cavities were not “plant” (an undefined term).
Lewison LJ noted a “fundamental preliminary hurdle” in that “[a]fter leaching and de -brining the resulting cavities are also part of the land in the same way as a worked out quarry or mine” so that “even after the de-brining, the land is still land” (paras. 77, 78). Even if this hurdle were surmounted, under the “premises test,” which entailed “deciding whether it is more appropriate to describe the item as apparatus for carrying on the business or as the premises in or upon which the business is conducted,” there had been no error below in finding that the cavities were not in the nature of apparatus (paras. 82-83).
Toronto (City) v Municipal Property Assessment Corporation Region 09, 2010 CanLII 151281 (ON ARB)
The appellants take the position that the surface portion of their lands in the City of Toronto, which were used for surface parking and the placement of advertising signs, were to be properly classified for purposes of the Assessment Act (Ontario) in the Commercial Property Class and that the “air rights” above the parking lot surfaces were properly classified in the Commercial Property Class, Vacant Land Subclass – whereas the position of the Municipal Property Assessment Corporation (“MPAC”) was that the density potential or development potential defined by the City zoning by-laws and referred to as “air rights” by the appellants was not land but rather, a restriction attached to the land, so that all of the land was being used for the purposes of surface parking and advertising signs and that the properties were properly classified wholly in the Commercial Property Class.
The Board first recognized the common law position (also referred to in the Cadillac Fairview decision, which it referred to) that:
Ownership of land confers rights in the air space above the lands and in the subsurface below the land. …
[T]he subject properties’ undeveloped air space is part of the land/real estate/real property. The use of the air space is restricted by the zoning by-law.
In nonetheless confirming the MPAC position, the Board stated:
The Board finds that neither the undeveloped air space above the subject properties or the rights to use the undeveloped air space are land within the meaning of the Act. Since they are not land, they cannot be a “portion of a parcel of land” eligible for a subclass. …
The air spaces above the subject properties have not been severed and alienated separately by a strata plan. They are not capable of standing on their own as land. …
The evidence is that the transfers of density rights are dealt with by agreements between parties and not by transfers of land under the Land Titles Act or Registry Act. …
There is no doubt that the density rights to a property have a value and that this value must be considered in determining the current value of the properties. If the subject properties transferred some of their density rights to another parcel of land, the evidence is that the properties losing density would have a lower current value and the property receiving the rights would have a higher current value. The description of the properties for assessment purposes would not change for the air space above the land which has not been severed as an integral portion of the property.
Administrative Policy
7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 4, 2016-0651791C6 F - Choix 45(2) et (3) - immeuble à logements
Before indicating that, if a duplex property is used more than 50% for rental use, so that it is not personal-use property, a capital loss realized on a sale of the property and relating to all of the non-depreciable component can be recognized (subject to s. 13(21.1)) as a capital loss notwithstanding its partial personal use, CRA stated:
[A] building and the land on which the building is located are a single property under the private law applicable in Québec.
[Reg.] 1102(2)… constitutes an exception to this rule in the tax context, but only for the purposes of certain provisions of the Income Tax Act. Indeed, subsection 1102(2) I.T.R. provides that the classes of property described in Schedule II shall be deemed not to include the land upon which a property described therein was constructed or is situated. Subject to subsection 13(21.1) of the Act, this provision, however, applies only for the purposes of calculating capital cost allowance, and recapture or terminal loss.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 45 - Subsection 45(3) | invalidity of s. 45(3) elections on duplex units applied only for changes of use after February 21, 2012 | 185 |
| Tax Topics - Income Tax Act - Section 54 - Personal-Use Property | land underlying duplex used 40% personally is not personal-use property | 233 |
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(iii) | capital loss recognition on land underlying duplex used 40% personally | 78 |
2 May 2002 Internal T.I. 2002-0122607 F - BIENS A USAGE PERSONNEL
On the disposition by an individual of a cottage which is a personal-use property (“PUP”) but not his principal residence, he realizes a capital gain of $15,000, which is attributable to a $25,000 gain on the land, and a $10,000 loss on the building. In finding that this does not signify that he has realized a $25,000 gain on the land, and a $10,000 loss on the building which is denied by s. 40(2)(g)(iii), the Directorate stated:
Where a building constitutes depreciable property … [Reg. 1102(2)] has the effect of splitting the property into two for the purposes of the Act, namely the land and the building.
In the case of a cottage that is a PUP, we are of the view that the land and the building will remain one and the same property for tax purposes if they constitute one and the same property for legal purposes. … [Here] the taxpayer will realize a capital gain of $15,000 on the disposition of his property. Since the cottage and the land constitute one and the same property in this situation, subsection 46(3) will not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property | where Reg. 1102(2) does not apply, land and building are a single property generating a single gain | 158 |
Subsection 1102(4) - Improvements or Alterations to Leased Properties
Administrative Policy
18 May 2022 Internal T.I. 2018-0788761I7 F - Amortissement – Travaux sur un bien loué et F&T
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing (“M&P”) operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13. Regarding whether the costs of such work should be added to the cost of the taxpayer’s Class 13 leasehold interest pursuant to Reg. 1102(4) before regard was had to Reg. 1102(5), CRA stated:
[A]n amount expended is for the making of improvements or alterations to a leased property within the meaning of subsection 1102(4) where such expended amount relates to property that is incorporated into the leased property and becomes the property of the lessor. …
Generally, the owner of a building owns everything that is joined to the building. Consequently, a tenant generally only acquires a leasehold interest in a property owned by another person when the improvements or alterations made by the tenant to that property are incorporated into it. However, the contract between the parties may provide otherwise. An analysis of each contract is therefore necessary in determining the ownership of a Particular Property in a particular situation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(5) - Paragraph 1102(5)(a) - Subparagraph 1102(5)(a)(iii) | rendering of an empty shell suitable for manufacturing constituted substantially changing its nature | 288 |
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | property does not satisfy the “solely” test in Class 8(b) where it was necessary for the proper functioning of the building | 265 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | cost of installing property part of that property’s cost | 357 |
| Tax Topics - General Concepts - Ownership | leasehold improvements are assimilated to the landlord’s property unless the lease specifies otherwise | 101 |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(5) | building shell was a building or structure/ addition refers to extension of structure | 294 |
IT-464R "Capital Cost Allowance - Leasehold Interest"
Subsection 1102(5) - Buildings on Leased Properties
Administrative Policy
18 May 2022 Internal T.I. 2018-0788761I7 F - Amortissement – Travaux sur un bien loué et F&T
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing (“M&P”) operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
Among other requirements, in order to be a Class 29 property, the above property needed to qualify as a Class 8(b) property (e.g., tangible property attached to a building and acquired for the purpose of manufacturing or processing) and not a Class 1(q) property (a building or other structure including component parts). The Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property could qualify as a Class 8 property (before then being potentially assimilated to Class 29), but went on to indicate that the above alterations to the Shells would be sufficient to deem the taxpayer’s leasehold interests to be a building or other structure, by virtue of Reg. 1102(5)(a)(iii). Regarding Regs. 1102(5)(a)(i) and (ii), it stated:
In light of the meaning of the terms "building" and "structure" in paragraph 1 of IT-79R3, a Shell, which is a structure with walls and a roof, may generally be considered a building or other structure for purposes of subsection 1102(5). Consequently, the Taxpayer is not considered to have erected a building, i.e., the Shell, for purposes of subsection 1102(5) where that building was erected by another taxpayer.
As for the concept of "addition", we are of the view that it generally refers to an extension to a leased building or other leased structure.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(5) - Paragraph 1102(5)(a) - Subparagraph 1102(5)(a)(iii) | rendering of an empty shell suitable for manufacturing constituted substantially changing its nature | 288 |
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | property does not satisfy the “solely” test in Class 8(b) where it was necessary for the proper functioning of the building | 265 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | cost of installing property part of that property’s cost | 357 |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(4) | to be improvements or alterations to leasehold interest, property acquisitions must be assimilated to landlord’s property | 225 |
| Tax Topics - General Concepts - Ownership | leasehold improvements are assimilated to the landlord’s property unless the lease specifies otherwise | 101 |
7 August 2014 External T.I. 2014-0528841E5 F - Changement à une résidence principale
A taxpayer renovates the basement of his home by adding a separate door, permitting access from the outside, in order to establish offices there of a wholly-owned corporation. The renovations are paid for by the corporation and the corporation pays rent to the taxpayer. Can the corporation claim depreciation on the leasehold improvements? CRA responded:
[T]he capital cost of a leasehold interest of class 13 property includes an amount that a tenant expends in respect of improvements or alterations to a leased property that are capital in nature, other than improvements or alterations that are included as a building or structure pursuant to subsection 1102(5).
In this case, we are of the view that the requirements of subsections 1102(4) and (5) of the Regulations are not applicable and that there is no need to apportion the capital cost of the leasehold interest among several prescribed categories. That being said, we are of the view that certain capital expenditures incurred are capital in nature and, therefore, are an integral part of the capital cost of the leasehold.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) | addition of a door to an exterior wall could be considered a structural change triggering a change of use | 136 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | taxable benefit if renovations paid for by tenant-corporation increase the FMV of property to owner-shareholder | 96 |
2015 Ruling 2014-0552291R3 - Paragraph 1102(5)(a) of the Regulations
Funding and erection of Apartment Base.
Two arm's length corporations (ACo and ALP PartnerCo) and a GP jointly owned by them (RealLPGPCo) jointly form an LP (RealLP) by ACo transferring land zoned for residential use to RealLP and by ALP PartnerCo contributing cash over time, equal to the fair market value of the land when it was contributed to RealLP, for its LP interest (with cash contributions occurring thereafter on a pro rata basis). RealLP will erect the shell of a large apartment building (including the land, the "Apartment Base") including elevators but not interior plumbing, wiring or drywall.
Construciton of Apartment Finishes and leasing
RealLP will lease the Apartment Base to a general partnership of which ACo and ALP PartnerCo are equal partners ("OpGP") under a net lease bearing a fair market value rent and with the lease specifying that OpGP is solely responsible for the cost of completing the constructing of the residential apartment complex ("Apartment Finishes") including common areas as well as the apartment units. OpGP will lease the completed units and manage operations.
Ruling
: "Paragraph 1102(5)(a)… will apply to the capital costs that are incurred by OpGP for the completion of the construction of the… Apartment Finishes…, with the effect that such costs will be included in Class 1… ."
20 July 2001 External T.I. 2001-0087205 F - BAIL TRAITEMENT DU PRENEUR
After discussing its general position that a lease is a lease and a sale a sale, CCRA stated:
Where a lessee, having entered into an emphyteutic lease, has itself erected a building or structure on leased land, it must consider the costs incurred in this regard as costs relating to depreciable property of the relevant prescribed class, and not as a leasehold interest, by virtue of subsection 1102(5) of the Income Tax Regulations. On the other hand, whether a lessee has ownership of a building under an emphyteutic lease is a question of law. The cases Rudnikoff 75 DTC 5008 and Cohen and Zalkind 67 DTC 5175 provide comments to this effect.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Substance | distinction between a sale and a lease is based on the legal terms of the arrangement | 199 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Proceeds of Disposition - Paragraph (a) | distinction between a sale and a lease is based on whether legally there is a sale or lease | 180 |
17 August 1994 External T.I. 9415235 - CAPITAL COST ALLOWANCE
Because Regulation 1102(5) is considered to apply to any building referred to in Schedule II which is either a building or a structure, and is not restricted to structures referred to in Classes 1, 3 and 8, Regulation 1102(5) would permit classification of a building that is constructed on leased land as a Class 37 property.
Revenue Canada Round Table CTF-1992 Conference, Q. 70 No. 922851 (Not Included in Final Report)
Regulation 1102(5) is restricted to references made in Schedule II to a building or other structure and does not deem the leasehold interest to be a building for the general purposes of the Act. It is the Department's position that leasehold improvement are property (other than a building or part thereof) acquired by the taxpayer within the meaning of s. 13(27).
IT-464R "Capital Cost Allowance - Leasehold Interest"
Exclusions from capital cost of leasehold interest
6. Certain amounts paid by a tenant in respect of a lease are not considered to form part of the capital cost of a leasehold interest. Examples of these are as follows:
(a) an amount paid by a tenant to cancel a lease (see IT-359R2), and
(b) an amount paid by a tenant in lieu of rent or as a prepayment of rent (see IT-261R).
7. A leasehold interest does not include the cost of alterations or improvements made by the landlord of a property at the request of the tenant. Such costs are either expenses of the landlord or subject to capital cost allowance depending on whether they constitute a current expense or a capital expenditure.
8. When a tenant makes improvements and alterations to leased property and subsequently abandons them, they are not considered to have been acquired by the landlord as a gift, bequest or inheritance under paragraph 69(1)(c). The landlord is, therefore, not entitled to claim capital cost allowance in respect of such property.
Paragraph 1102(5)(a)
Subparagraph 1102(5)(a)(iii)
Administrative Policy
18 May 2022 Internal T.I. 2018-0788761I7 F - Amortissement – Travaux sur un bien loué et F&T
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing (“M&P”) operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
Among other requirements, in order to be a Class 29 property, the above property needed to qualify as a Class 8(b) property (i.e, "tangible property attached to a building and acquired solely for the purpose of (i) servicing, supporting, or providing access to or egress from, machinery or equipment [or] (ii) manufacturing or processing") and not a Class 1(q) property (a building or other structure including component parts). Although the Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property (because at common law the improvements became part of the property of the landlord) could qualify as a Class 8 property (before then being potentially assimilated to Class 29), the Directorate went on to indicate that the above alterations to the Shells would be sufficient to deem the taxpayer’s leasehold interests to be a building or other structure, stating:
Generally, alterations to a property do not materially change the nature of the property if, after the alterations, the use and size of the property remain the same. …
Similarly, we are of the view that alterations to a property materially change its nature where the property has no particular purpose before the work is carried out but does have a particular purpose after the work is carried out.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | property does not satisfy the “solely” test in Class 8(b) where it was necessary for the proper functioning of the building | 265 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | cost of installing property part of that property’s cost | 357 |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(4) | to be improvements or alterations to leasehold interest, property acquisitions must be assimilated to landlord’s property | 225 |
| Tax Topics - General Concepts - Ownership | leasehold improvements are assimilated to the landlord’s property unless the lease specifies otherwise | 101 |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(5) | building shell was a building or structure/ addition refers to extension of structure | 294 |
Subsection 1102(14) - Property Acquired by Transfer, Amalgamation or Winding-Up
Cases
Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336, [1998] 1 CTC 213
Regulation 1102(14) deemed the taxpayer to have acquired assets for the purpose of gaining or producing income because it received those assets as a result of the winding-up of its subsidiary under s. 88(1) of the Act.
Administrative Policy
2019 Ruling 2018-0772921R3 - Loss utilization
Aco, and its subsidiary Bco, have available capital losses that they wish to use in stepping up the undepreciated capital cost of trademarks (Class 14.1 properties, presumably having a nominal or modest capital cost) which Bco uses in the course of carrying on its business. In broad terms, this is accomplished by Bco using up its losses in spinning the trademarks off to Aco on a partial rollover basis, and by Aco dropping the trademarks down to Bco to also use up its losses. More specifically:
- Aco establishes a new sister to Bco (Newco) to which Aco does an s. 85(1) drop-down of preferred shares of Bco having a fair market value equaling that of the trademarks;
- Bco spins-off the trademarks to Newco on a partial rollover basis in consideration for prefs of Newco, thereby using Bco’s net capital losses to effect a ½ step-up of the UCC of the trademarks under s. 13(7)(e)(ii) – and with Newco licensing the trademarks back to Bco for royalties;
- The prefs in 1 and 2 above are cross-redeemed (with reliance on the s. 55(3)(a) exception to s. 55(2));
- Newco is wound-up under s. 88(1);
- Aco does an s. 85(1) drop-down of the trademarks back to Bco, but choosing an elected amount so as to uses up its net capital losses and to effect a further ½ step-up of the trademarks' UCC under s. 13(7)(e)(ii).
The CRA summary of this transaction emphasizes that Reg. 1102(14) deems the trademarks to have the same (Class 14.1) class to Newco, Aco and Bco in succession.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) - Subparagraph 13(7)(e)(ii) | net capital losses used to step up UCC of trademarks | 354 |
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(b) | self-cancelling circular transaction to convert net capital losses into stepped-up UCC | 85 |
22 June 2015 Internal T.I. 2014-0553731I7 - Deduction of Terminal Loss - Wind-up
On the winding-up of Subco into Parentco (which had held only investments) under s. 88(1), Parentco received the "Property," which had been depreciable property owned by Subco and used in its business. Parentco did not acquire the Property for the purpose of earning income and never received income from the Property, and it was held idle for XX years before being disposed of to an arm's-length purchaser for proceeds of disposition less than its UCC, with the result that Parentco no longer owned any property of the relevant prescribed classes. Was the terminal loss claimed by Parentco deductible under s. 20(16)? In responding affirmatively, the Directorate stated:
Because the definition of UCC and Part XI of the Regulations are intertwined, it appears contrived to conclude that the presumptions in paragraph 1102(14)(d) of the Regulations are restricted to Part XI of the Regulations and cannot inform our reading of the definition of UCC in subsection 13(21). The same comments could be extended to subsection 20(16).
In Hickman Motors…[w]riting for 3 out of the 4 majority Justices, Justice McLachlin wrote:
Hickman Motors Ltd. is deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14)… . So long as Hickman Motors Ltd. did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remains eligible for a capital cost allowance deduction.
…[T]he discussion by Justice L'Heureux-Dubé… does not contradict the views of Justice McLachlin…[respecting] the preservation of the classification as depreciable property of a prescribed class on the wind-up.
… Justice L'Heureux-Dubé seemed to suggest that Mara Properties stands for the proposition that subsection 88(1) deems the parent to have received property of the same character from its subsidiary upon the subsidiary's wind-up.
Based on a TCP interpretation of paragraph 88(1)(f), on the application of the presumption in subsection 1102(14) of the Regulations and on the comment by Justice L'Heureux-Dubé regarding Mara Properties, it seems reasonable to conclude that the Property received from Subco on the Wind-up initially retains its character as depreciable property of a prescribed class in Parentco.
CRA went on to find that keeping the property idle did not constitute a change of use under s. 13(7)(a), so that the terminal loss was not realized until the year of the sale, and that, in the meantime, as Parentco did not satisfy the income-producing source test in the preamble to s. 20(1), it was prohibited from claiming capital cost allowance on the property.
See summaries under s. 13(7)(a) and s. 20(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) | property remaining idle after deemed acquisition as depreciable property not a change of use | 176 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) | deemed depreciable property in fact not used for income-producing purpose | 199 |
S4-F7-C1 - Amalgamations of Canadian Corporations
1.33 …[W]here a predecessor corporation was not dealing at arm's length (otherwise than because of a right referred to in paragraph 251(5)(b)) with the new corporation immediately before the amalgamation, subsection 1102(14) of the Regulations deems property of a prescribed class or separate prescribed class of the predecessor corporation immediately before the amalgamation to be property of that same prescribed class or separate prescribed class of the new corporation. For instance, where a property of a predecessor corporation is a timber limit which subsection 1101(3) of the Regulations prescribes to be a separate class of property, the property will be of that same separate prescribed class following the amalgamation and will not be a timber resource property as defined in subsection 13(21). The new corporation is not, however, relieved from any conditions that must be met for the property of a class to be eligible for enhanced capital cost allowance. For example, a property that was included in a separate class by virtue of an election under subsection 1101(5b.1) of the Regulations will continue to be included in that class following the amalgamation without a further election but will be eligible for the enhanced rate of capital cost allowance in paragraph 1100(1)(a.1) of the Regulations only if the property meets the requirements of that Regulation at the end of the particular year.
1.34 Subsection 1102(20) of the Regulations is an anti-avoidance rule which deems the new corporation and a predecessor corporation to be dealing at arm's length for, among other things, the purposes of subsections 1100(2.2) and 1102(14) of the Regulations. This anti-avoidance provision will apply where a new corporation would be considered not to deal at arm's length with a predecessor corporation as a result of a transaction or series of transactions the principal purpose of which may reasonably be considered to have been to cause subsection 1100(2.2) or 1102(14) of the Regulations to apply to a given amalgamation.
10 April 1997 T.I. 970422
A building was transferred to a company in a non-arm's length transaction (so that Regulation 1102(14)(d) applied) and the company thereupon commenced to use the building for rental purposes. At the time the building commenced to be used for rental purposes it would be reclassified into a separate prescribed class in accordance with Regulation 1101(1ac) and s. 13(5) of the Act.
90 C.R. - Q38
Where s. 251(3.1) deems Amalco and the predecessors to be related persons, s. 1102(14) will deem the property acquired by Amalco from the predecessors to be property of the same class.
Subsection 1102(23)
Administrative Policy
13 March 2017 External T.I. 2016-0626641E5 F - Election - Subsection 1101(5b.1) Reg.
CRA considered that if there are two separate additions to a pre-2007 non-residential building, an election under Reg. 1101(5b.1) must be made on each separately and each addition will fall into a separate class – whereas if the work on a single addition extends over more than one year (or there is a subsequent second addition to further extend the first addition), the election can be made at the end of the first year with respect to the work done to date (although this might have no immediate impact under the available-for-use rules) and the subsequent work will fall into the same separate deemed new class without any need to make a second election.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 1101 - Subsection 1101(5b.1) | only one Reg. 1101(5b.1) election is required where work on an addition to a non-residential building extends over more than one year | 338 |